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Class 11 Finance Chapter 2 Associated Concepts
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VERY SHORT TYPE QUESTIONS & ANSWERS
1. What is the meaning of word barter?
Ans: The meaning of word barter is to trade by exchanging one commodity for another.
2. Which is an example of barter?
Ans: An example of barter is when the people within a community exchange goods and services so that money needn’t be used. An example of barter is bread provided in exchange for butter.
3. What is inflation and its effects?
Ans: Inflation is the rate at which the prices for goods and services increase. Inflation often affects the buying capacity of consumers. Inflation refers to the increase in the prices of the goods and services of daily rise, such as food, housing, clothing, transport, recreation, consumer staples,etc.
4. What are the three effects of inflation?
Ans: Three effects of inflation are eroded purchasing power, like how a dollar will not buy you as much chewing gum as it used to, eroded income like when people’s wages do not rise with inflation, and lower returns from interest, like when a bank’s interest rate matches the inflation rate savers break even.
5. What do you mean by inflation?
Ans: Inflation is the decline of purchasing power of a given currency over time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
6. What are the main causes of inflation?
Ans: Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (AD) (economic growth too fast) or cost-push factors (supply-side factors).
7. What are the effects of inflation in India?
Ans: One of the major results of inflation in an economy is the general slowdown of the economy. When this happens unemployment rates rise, the purchasing power of the consumer decreases, credit becomes expensive. All these cause a strain on the entire financial system of the country.
8. Which is a common effect of inflation?
Ans: Common effects of inflation include: Prices Rise. The most obvious effect of inflation is higher prices on everyday goods and services. That means a higher cost of living, but also generally higher wages.
9. What are the negative effects of inflation?
Ans: The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future.
10. What are the effects of inflation on production?
Ans: Inflation adversely affects the volume of production because the expectation of rising prices along-with rising costs of inputs bring uncertainty. This reduces production.
11. Give the definition of inflation?
Ans: Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time.
12. What are the four phases of the trade cycle?
Ans: The trades cycle or business cycle are cyclical fluctuations of an economy. A full trade cycle has four phases: (i) Recovery, (ii) Boom, (iii) Recession, and (iv) depression.
13. What is the trade cycle and how does it works?
Ans: A business cycle, sometimes called a “trade cycle” or “economic cycle,” refers to a series of stages in the economy as it expands and contracts. Constantly repeating, it is primarily measured by the rise and fall of gross domestic product (GDP) in a country.
14. What is the purpose of trade cycle?
Ans: The economic trade cycle shows how economic growth can fluctuate within different phases, for example: Boom (which is a period of high economic growth possibly causing inflation)
15. What is a trade cycle in banking?
Ans: A business trade cycle or simply “the trade cycle” is the cycle countries go through as collective economic activity ebbs and flows. The Central Bank also takes note of the business cycle when setting monetary policy and controlling short-term interest rates.
16. What are the trade cycle varies depending on?
Ans: The trade cycle varies depending on: The nature of the organisations (or individuals) involved. The frequency of trade between the partners to the exchange. The nature of the goods or services being exchanged.
17. What are the characteristics of a trade cycle?
Ans: “A trade cycle is composed of periods of good trade characterised by rising prices and low unemployment percentages, alternating with periods of bad trade characterised by falling prices and high unemployment percentages.”
18. What is trade cycle explain its phases and features in detail?
Ans: A trade cycle refers to fluctuations in economic activities specially in employment, output and income, prices, profits etc. It has been defined differently by different economists. According to Mitchell, “Business cycles are fluctuations in the economic activities of organised communities.
19. What are the characteristics of each phase of cycle?
Ans: A business cycle is said to be complete when the eco. through a contraction and expansion in sequence. While the ex reflects a rapid economic growth rate, the contraction reflects an eco. recession. The important business cycle phases are expansion, peak, recession, depression, trough and recovery.
20. Which is not a characteristic of trade cycle?
Ans: Business cycles occur periodically though they do not exhibit the same regularity. Explanation: A business cycle has many fluctuations and it depends on the economic condition of a country. The sequence of changes that take place in the business cycle occurs again and again but are not periodic in nature.
21. What are 3 characteristics of the peak phase of the business cycle?
Ans: The peak is characterised by an allround optimism in the economy – income, employment, output, and price level tend to rise. Meanwhile, a rise in aggregate demand and cost leads to a rise in both investment and price level.
22. What are the characteristics of prosperity?
Ans: Prosperity is the flourishing, thriving, good fortune and successful social status. Prosperity often produces profuse wealth including other factors which can be profusely wealthy in all degrees, such as happiness and health..
SHORT & LONG TYPE QUESTIONS & ANSWER
1. What is barter system and its problems?
Ans: A system of exchanging goods without using money is known as barter system. The problems associated with the barter system are inability to make deferred payments, lack of common measure value, difficulty in storage of goods, lack of double coincidence of wants. You can read about the Monetary System – Types of Monetary System (Commodity, Commodity-Based, Fiat Money) in the given link.
In the barter system, there is also the problem of storing your wealth, whereas in the monetary system, there is no such problem of storage.
2. State the meaning of prosperity.
Ans: Prosperity is a phase of trade cycle. It is characterised by increased production, high capital investment in basic industries, expansion of bank credit, high prices, high profits, a high rate of formation of new business enterprises and full employment.
3. State the meaning of Recessions.
Ans: The phase which is characterised by fear and hesitation on the part of the businessmen is called Recession. In this phase of trade cycle, businessmen lose confidence. Everyone feels Pessimistic about the future profitability of investment.
4. State the meaning of Revival or Recovery.
Ans: The revival or recovery phase refers to the lower turning point at which an economy undergoes changes from depression to prosperity. During this phase, there is slight improvement in economic activity to start with.
5. State the meaning of Depression.
Ans: Depression is a phase of trade cycle where business activity in the country is far below the normal. It is characterised by a sharp reduction of production, mass unemployment, low employment, falling prices, falling profits, low wages, contraction of credit etc. and an atmosphere of allround pessimism and despair.
6. What are the advantages of Barter System?
Ans: The advantages of Barter System are:
(a) Simple System: The barter system is very easy and simple. Goods and services are exchanged without the use of money.
(b) Balanced production: The Barter economy is a simple economy where people produce goods either for self consumption or for exchange with other goods which they want.
(c) Proper utilisation: In this system, natural and personal resources are properly utilised to meet the needs of the society.
(d) Reduction of Economic inequalities: Under this system, there is no possibility of storing goods over a long period. As a result there is no problem of concentration of economic power into the hands of rich people.
(e) Free from problems of foreign trade: Foreign trade problems such as foreign exchange crises do not exist under the barter system.
7. What is Trade Cycle or Business cycle? What are the features or characteristics of Trade Cycle?
Ans: The term trade cycle is used to denote the fluctuations in economic activity which occurs in a more or less regular interval of time. Each fluctuation, the rise and fall taken together, is called trade cycle.
The features of Trade cycle are:
(a) It is like a wave movement. It is characteristized by downward and upward movement.
(b) They are irregular in nature. The peaks and troughs do not occur at regular intervals.
(c) The phases of a trade cycle appear in all types of business in different variations.
(d) Though they are international in character, yet they did not affect all the countries equally.
(e) In trade cycle, profits fluctuate more than other incomes
8. What is trade cycle? What are its features?
Ans: The term ‘trade cycle’ in economics refers to wave like fluctuations in the aggregate economic activity, particularly in employment, output and income. Trade cycles are ups and downs in economic activity.
According to Haberler, “The business cycle in the general sense may be defined as an alteration of periods, of prosperity and depression, of good and bad trade.
The features of trade cycle are:
(i) It is a wave like movement.
(ii) Cyclical fluctuations are recurrent in nature.
(iii) Expansion and contraction in a trade cycle are cumulative in effect.
(iv) Trade cycles are all-pervading in their impact.
(v) A trade cycle is characterised by the presence of a crisis.
9. What is Barter System? Discuss the inconveniences of Barter System.
Ans: The Barter System refers to when goods and services are exchanged directly with other goods and services.
Chandler defines barter system as “The direct exchange of economic goods, one for another.
The Barter System has the following inconvenience:
(i) Lack of double coincidences of wants: First of all, there happens to be a lack of double coincidence of wants. Exchange can be possible only if both the parties can spare what the other party wants. A person who needs cloth against wheat must first find out a person who needs wheat and has cloth to give in return. Much time is lost in finding out the right party.
(ii) Problem of measurement of value: There are the problems of measurement of value. A metre measures distance and comparison becomes easy. But the value of a commodity is different in terms of different commodities. A chair is equal to 10 kg of sugar, 2 metres of cloth, 5 litres of milk etc. All this is very confusing. The number of exchange ratios will be very large.
(iii) No degree of specialisation: Specialisation increases the quantity produced of any commodity. Therefore, more exchange deals have to be done: Under barter, there is great wastage in determining the rate of exchange between two commodities. While, money facilitates exchange and specialisation.
(iv) Lack of divisibility: Another difficulty of Barter System relates to the fact that all goods cannot be divided and subdivided. Under barter system small exchanges were very difficult as some commodities or items are indivisible. For example, if the price of a horse is equal to a quintal of rice, then a person having 50 kg rice can not exchange it for the horse because it is not possible to divide the horse in small pieces without destroying its utility.
(v) Problem of future payments: Contracts about future payments will become difficult. Often contracts mention payment of wages and interest at some future date, such contracts would become difficult. There may be controversy as to the specific commodity to be used for repayment. The specific commodity to be used for repayment may rise or fall much in value. The borrowers or lenders will lose.
(vi) The problem of storing wealth: Under a barter system, there is absence of a proper and convenient means of storing wealth or value. As most of the commodities were non durable or perishable, thus capital formation through, savings in terms of those commodities were impossible.
(vii) Lack of General Purchasing Power: There is lack of general purchasing power, something which is commonly acceptable to purchase other goods and services and in final discharge of debts.
10. What is Inflation? Discuss the causes and effects of Inflation.
Ans: Inflation means a substantial and rapid increase in the general price level which causes a decline in the purchasing power of money.
According to Crowther, Inflation is a “State in which the value of money is falling, that is the prices are rising.”
Causes – Inflation is the result of disequilibrium between demand and supply forces and is attributed to –
(a) An increase in the demand for goods and services in the country and
(b) A decrease in the supply of goods in the economy.
Factors causing Increase in Demand:
(i) Increase in money supply.
(ii) Increase in government expenditures.
(iii) Increase in Exports.
(iv) Increase in population.
(v) Paying off debts.
Factors causing decrease in supply:
(i) Scarcity of factors of production Natural calamities.
(ii) Natural calamities.
(iii) Hoarding by traders.
(iv) Industrial Disputes.
(v) Hoarding by consumers.
Effects of Inflation: Inflation has its own impact and can be discussed under two subheads.
(i) Effects on production
(ii) Effects on distribution
(i) Effects on production: Production is highly influenced by inflation. Mild inflation acts as a stimulant to the economy. An increase in money supply in an economy where resources are yet to be fully employed will result in gradual rise in price level. In such an economy the cost of production does not rise in the same ratio as the prices. A higher rise in prices results in more profit margin. It creates optimism in business. This induces more investment. Rise in productive activity starts. Factors of production are employed more. Income of the agent of production rises. The process of investment and employment continues for some time. The economy may reach the point of full employment. If money supply increases after the point of full employment leading to more pressure of investment, prices rise sharply. This leads to hyper-inflation. Hyperinflation is destructive for the economy. It will adversely affect the productive system and create unemployment.
(ii) Effects on Distribution: A prolonged period of Persistent inflation results in redistribution of income and wealth. Inflation does not affect all sections of the society alike. Some gain during inflation, while others lose. These ‘gains’ and ‘losses’ results in redistributing income and wealth within the society. The effects of inflation on different sections of the society may be discussed as under –
(A) Farmers: Generally farmers gain during inflation. The prices of farm products rise, but the cost of production incurred earlier was comparatively lower. It provides extra profit to farmers. Moreover farmers may gain further by repaying his loans borrowed earlier when purchasing power was high, on the other hand the small farmers suffer during inflation.
(B) Entrepreneur and Business Community: The Business Community and Entrepreneurs gain during inflation because when they buy raw materials the prices are low and by the time, they reach market as finished products for sale, they sell at higher prices and hence more profits.
(C) Investors of equity holders: The holder of equity shares, stock etc. gain in inflation. The rate of return on equity varies with Profit. During inflation business houses make abnormal profit. A part of extra profit is enjoyed by equity holders. So they gain.
(D) Wage and Salary Earners: Wage and salary earners generally lose during inflation. Although their wages and salaries go up in the wake of rising prices but wages and salaries generally do not rise in the same proportion in which the price lives or their cost of living rises.
(E) The government: The government belongs to a flexible income group: Due to inflationary rise in prices its revenue collection also increases. However, its expenditure also increases. Even if its monetary expenditure may increase but real expenditure may not. It is admitted that rise in prices may raise revenue but it fails to restore pre inflation expenditure. Repayment of public debt provides gain to the government.
(F) Debtors and creditors: During inflation Debtors stand to gain because they had borrowed when the purchasing power of money was high and now return the loans when the purchasing power of money is low. The creditors, on the other hand stand to lose because they may get back less in terms of goods and services than what they had lent.
(G) Fixed Income Group: Fixed income group loses in inflation. Pensioners, holders of fixed interest bearing investment receive fixed earnings. With the fixed income they can buy less goods during inflation. It discourages saving and capital formation.
11. Mention the basic features of inflation.
Ans: Following are the basic features of inflation:
(i) Inflation is always accompanied by a rise in the price level. It is a process of uninterrupted increase in prices.
(ii) Inflation is an economic phenomenon and it is generally caused by excessive money supply.
(iii) Inflation is a dynamic process as observed over the long period.
(iv) A cyclical movement of prices is not inflation.
(v) Pure inflation starts after full employment.
(vi) Inflation may be demand pull and cost push.
12. Discuss the different phases of trade cycle.
Ans: A trade cycle is commonly divided into four phases such as –
(a) Prosperity: The economic activities are expanding in upward trend from the phase of Revival. So the upward trend in the economy from the Revival is the starting point of prosperity. This phase is characterised by the following way.
(i) A high level of output and trade.
(ii) A high level of effective demand.
(iii) A high level of employment and income.
(iv) A rising structure of interest rate.
(v) A large expansion of Bank Credit.
(vi) A high marginal efficiency of capital.
(vii) A price inflation.
(viii) Overall business optimism.
(ix) Tendency of the economy to operate at almost full capacity along with the production possibility frontier.
(b) Recession: When prosperity ends, the recession begins. It relates to a turning point rather than a phase. During prosperity investment, production, employment, reaches maximum limit. Cut throat competition arises on raw material, Labourer, capital etc. Consequently production cost increases and profit margin decreases. As goods are available in the market, so no possibility of selling the goods in the market.
The Businessmen lose confidence. Everyone feels pessimistic about the future profitability of investment. Hence, investment will be drastically curtailed and production of capital goods industries will fall.
(c) Depression: It starts from the phase of recession. In this phase business activity in the country is far below the normal. It is characterised by a sharp reduction of production, mass unemployment, low employment, falling prices, falling profits, low wages, contraction of credit, a high rate of business failures and an atmosphere of all round pessimism and despair.
A decline in output or production is accompanied by a reduction in the volume of employment. The prices of manufactured goods fall to low level. The manufacturers suffer huge financial losses. Many of these firms have to close down on account of accumulated losses.
(d) Recovery or Revival: It implies increase in business activity after the lowest point of the depression has been reached. During this phase, there is slight improvement in economic activity, to start with. The entrepreneurs begin to feel that the economic situation was after all, not so bad as it was in the preceding stage. This leads to further improvement in business activity. Industrial production picks up slowly and gradually.
The volume of employment also steadily increases. There is a slow, but sure rise in prices accompanied by a small rise in profits. The wages also rise, though they do not rise in the same proportion in which the prices rise. Attracted by rising profits, new investments take place in capital goods industries. The banks expand credit. The business inventories also start rising slowly. The pessimism and despair of the preceding period is replaced by an atmosphere of all-round cautious hope.